Why George Osborne should scrap National Insurance

Far from 'insurance' against hardship, NI is now a little-understood stealth
tax which discriminates against employees. It's time to get rid of it

The Chancellor must play his cards right. Geddit?Photo: REX FEATURES

By Tom Hitchings

1:50PM BST 06 Jul 2015

No one would invent the tax system we have today. It is complex, opaque and unfair. The chief culprit is National Insurance.

National Insurance (NI) grossly discriminates against employees. They are charged higher rates than people who are self-employed, paying thousands of pounds extra every year. However, the complexity of NI means these additional taxes go largely unseen.

Let me give you an example. An employee earning £30,000 per year pays £2,600 in NI, while their employer must contribute a further £3,000. On the other hand, a self-employed individual earning the same amount contributes just £1,900. These disparities widen as incomes rise:

In theory, NI payments are split between employees and employers, but this distinction has little economic significance. If employers are forced to make NI contributions, then they will simply pay workers less.

For self-employed individuals earning over £100,000, on the other hand, this loophole allows them to save tens of thousands of pounds.

Government should not force some people to pay higher rates of tax just because a firm employs them. People who work for themselves deserve support for their entrepreneurship and endeavour, but government subsidies should be directed at businesses and investment, not providing loopholes for contractors, celebrities and other self-employed individuals.

First, he should propose a "single income tax", merging each employee's NI contribution into their income tax rate. Yes, those rates would appear to go up, but nobody would actually be paying any extra money. Many, to the contrary, would pay less - because where NI must be paid on annual earnings over £8,064, Single Income tax could use the higher personal allowance of £10,600 (or, in the future, £12,500).

Finally, in order to protect pensioners from the higher income tax rates - which would reduce their pension payments - he should increase their tax-free allowances to £20,000, so they keep more of their incomes and only the very richest are worse off. Some self-employed individuals could also receive higher allowances, to reduce the impact on those on low or medium incomes. Savers are already protected from higher income tax rates by generous ISA and further changes in the pipeline.

George Osborne contemplating the complexity of NI (Photo: REX FEATURES)

Of course, some will object that abolishing National Insurance spells the end of Britain's "contributory" benefits - the idea that we get back what we have already paid in. NI was intended to repay those in work with benefits like unemployment insurance, sick pay and pensions when they needed them.

Given this, cynics might argue any Chancellor would be mad to scrap NI. But as National Insurance rates have gone up, the potential gains from abolishing it have multiplied.

Scrapping NI offers the government to opportunity to fundamentally redraw the tax system to make it fairer. A single income tax would enable most working people to keep more of their income and force future Chancellors to be honest about how much they take from payslips.

Tom Hitchings is a postgraduate student researching public policy at the University of Cambridge.